Alcoa's earnings are highly sensitive to movements in aluminum prices. Aluminum prices dipped in the final quarter of the year, largely because the Chinese winter production cuts were not as drastic as previously anticipated. However, a rally toward the end of December helped to average out the prices at a higher level for the full quarter. The rally was driven by an expectation of several rounds of inspection by the Chinese government into the country’s industrial activity starting in January, which should help in ensuring that production levels are within the initial guidelines.

Additionally, China’s stringent pollution control policies are discouraging aluminum producers from constructing new smelters in the country. This could limit the potential of increased supply in the near future, and could drive prices up.

Alumina Prices Also to Average Out Higher

Apart from aluminum, higher price realizations for alumina, a primary raw material used in aluminum production, could also boost the company's revenues. Alumina shares similar market dynamics as aluminum, and is therefore likely to see similar trends for Alcoa in the quarter. In its third quarter earnings release, the company reported that it supplies close to 68% of its alumina production volumes to third parties. Thus, higher alumina price realizations would enable the company to substantially improve its revenue from this segment (as opposed to keeping much of the volumes in-house). The company revised its 2017 EBITDA outlook upwards to $2.4 billion in its Q3 earnings release, a revision of about 11% from its previous estimate. This was largely driven by a higher pricing outlook for both alumina and aluminum.